Sell Discipline

November 29, 2023 by Rod Huerta, CIMA® »
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When investing in stocks, it is certainly important to focus on what companies to purchase, but just as important is knowing when to sell. We call this having a good “sell discipline.” Taylor Swift tells us to “shake it off” in her catchy song about not sweating the small stuff. It is much harder for us to accept our losses, shake it off and move on, instead of holding on to a stock or fund waiting for a comeback that hampers future portfolio returns. But when is the right time to sell a losing position? 

There are no one-size fits all type of strategies for selling an individual stock or a fund, outside drastic changes in fundamentals, or a sudden need to raise cash that may trigger a full or partial liquidation. Investors looking for an exit strategy regarding a specific portfolio holding should base their decisions on factors such as risk tolerance, investment horizon, strategy, and financial goals. A client may also consider selling a position if looking for a potential tax-benefit or loss-harvest. Whatever the case may be, it is important that you talk with your portfolio manager about when to sell a security. 

Behavioral investing tells us that investors should avoid loss-aversion biases, or holding on to losing positions that may never get back to a breakeven price. The former is also known as the “Breakeven Fairy Tale.” Instead, investors should consider the opportunity cost of not selling. This may mean giving up on the potential gains of a different investment alternative with better and stronger fundamentals and an attractive valuation. 

When a portfolio manager simply trims or liquidates positions with the goal of rebalancing, clients should keep in mind that these adjustments are done with the final objective of portfolio diversification, while keeping a close eye on your personal risk tolerance. These risk parameters are established in our Investment Policy Guideline or “IPG” and they mandate the ideal mix between risk and reward for your personal risk tolerance. When we establish these guidelines with you, we try and identify those positions that you may have a unique attachment to and discuss how to address any necessary sales.

In summary, when investing in equity and bond markets, investors should utilize research on what securities to buy as much as having discipline to sell. 

Meet Rod Huerta, CIMA® »


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